China's Negatives

When all the commentary is gushingly optimistic, it is time to review the recognized negatives.This writer takes a shot at it.As usual, there is plenty to agree with and also plenty to question.

We are certainly a long way from having convincing facts and statistics to deal with.We must use rather rough proxies to make sense out of the situation.

The economy is clearly growing, and has grown on the phased urbanization of China’s youth.Their needs have stimulated all other sectors.The problem today is that process is actually complete.This has been hidden by the recent slowdown, but is still there.Growth must now come from productivity gains and a rapid expansion of the service industry that provides jobs for secondary workers.

Realistically, I now expect growth to taper of to around four percent over the next decade.This is still pretty substantial and will provide internal depth to the economy.They have also now learned that they can no longer solely rely on tapping the export market.Their first task is to convert that capacity over to internal consumption.

China is not going to create a credit bust for a long time yet.Remember that centuries ago China invented fiat currency and also all the possible related fiascos that that can engender.No one needs to tell them how easy it is to destroy the currency and that to do so is treason.

I myself have always tried to ignore politicians and governments and instead focused on the people.Can they get the job done?In China’s case, they certainly can.At worst they bribe a local official to get their way.Their confidence stems from believing that a market of 1.3 billion is insatiable.Until they are proven wrong and everyone is as rich as an average American, they will not let up.

This is why the economy has grown hell bent for leather for a solid thirty years and why they are shaking off the US credit hangover so quickly.

The worries over the inappropriateness of the educational system are badly misplaced.The task of the school system is to ensure that every twelve year old can read, write and do basic arithmetic.It is boring and requires drill.After that it simply does not matter much.

The talented individual will mostly self educate himself.The rest will grumble and ultimately find a way to fit into the adult world.All the Marxism in the world will not alter that.Governments forget that the recipients of an education are thinking people who will reject contradiction sooner than leter.

China's Economy To Reach $123 Trillion?

A Nobel Prize winner seems to think so. Here's why he's wrong.

China will have a $123 trillion economy by 2040. By then, the country will account for 40% of the world’s gross domestic product and be “superrich.” The American economy, by way of contrast, will produce only 14% of global output. And Europe? The E.U. will claim just 5%. So says Robert Fogel, and he has a Nobel prize in economics to prove he knows a lot.

The famous University of Chicago professor believes analysts “fail to fully credit the forces at work behind China’s recent success or understand how those trends will shape the future.” Far from overestimating China’s growth, Beijing is underestimating it.

Why will the Chinese economy expand so fast? There are many factors at work, Fogel says. First, China has made an “enormous” bet on education, substantially increasing school enrollments following a campaign initiated in 1998 by then-supremo Jiang Zemin. “I forecast that China will be able to increase its high school enrollment rate to the neighborhood of 100% and the college rate to about 50% over the next generation,” Fogel writes, apparently channeling New York Times columnist Thomas Friedman, who also is euphoric about China’s educational system.

The second underestimated factor is the now-undeveloped rural sector, which last year was home to 55% of China’s people. Urbanization, which boosts economic output by three percentage points a year, is the key here.

Third, we do not fully take into account the fast-growing service sector. Small firms hide their successes from the government, and Beijing’s statisticians do not capture “improvements in the quality of output.”

Fourth, Fogel thinks highly of China’s one-party state. “The Chinese political system is likely not what you think,” he writes. There is a back-and-forth between government officials and technocrats. Fogel states: “Chinese economic planning has become much more responsive and open to new ideas than it was in the past.” He cities his participation in something called the Chinese Economists Society as evidence of reformed one-party state politics.

Finally, Fogel places much hope in China’s “long-repressed consumerist tendencies.” Beijing, he believes, is responding to what people want: “Indeed, the government has made the judgment that increasing domestic consumption will be critical to China’s economy, and a host of domestic policies now aim to increase Chinese consumers’ appetite for acquisitions.”

Is Fogel’s sunny view correct? First, he neglects to mention that China’s educational system, despite all the money it receives, remains inappropriate for a modern society. Hu Jintao, China’s leader since 2002, has been reinvigorating Marxist education and reinforcing orthodoxy. That’s great, but only if you want to know what Engels or Mao thought about the value of labor or why the Communist Party must maintain a monopoly on power. Fogel should also have mentioned something about the ingrained corruption, pervasive plagiarism and creativity-stifling curricula that are the hallmarks of Chinese schooling. There’s no question the county’s educational system has made some progress in the last 10 years, but the surprisingly meager advance is hardly a reason to think the Chinese will dominate the global economy in a generation.

Second, Fogel is right to note that migration of labor to cities has been the engine of Chinese growth, but that process has stalled in the global economic downturn. Yes, China still has cheap labor, but not mentioned in the article are the generally accepted projections that the labor force will level off in a half decade and then shrink. Moreover, he neglects to note that wage rates will increase as China becomes more prosperous. Already, industry is moving to other counties, such as neighboring Vietnam, to take advantage of even cheaper labor. So urbanization in the next 30 years cannot continue at nearly the same pace as it has in the last 30.

Third, it’s true that Beijing’s National Bureau of Statistics does not fully account for the output of the fast-growing service sector. That’s why its estimate of 13.0% growth for 2007 is low by about two percentage points. Then, small businesses were the most vibrant part of the economy. Today, the failure to properly assess the output of small business is resulting in anoverestimation of GDP because these enterprises, which tend to be more dependent on exports, are suffering more than the larger ones. Fogel, a recognized genius, should have figured this out.

Fourth, Fogel’s views of the political system are questionable. He neglects to say that Hu Jintao has presided over a seven-year crackdown and that the Communist Party tolerates less criticism today than it did two decades ago. Economic reform has stalled because China has progressed about as far as it can within its existing political framework.

Further economic reform would threaten the power of the Communist Party, so the Party will not sponsor much more change.

A true market economy, for example, requires the rule of law, which in turn requires “institutional curbs” on government. Because these two limitations on power are incompatible with the Party’s ambitions to continue to dominate society, China cannot make much progress toward them, at least as long as the Communist Party is around. I don’t care how many conferences Fogel gets invited to. China’s economy has just about reached the limit of what is possible.

Fifth, Fogel apparently knows almost nothing about Chinese consumer spending. Historically, consumption contributed about 60% of China’s economic output. Today, it accounts for about 30%--and that number is going lower. Why? Beijing’s stimulus spending, about $1.1 trillion last year, is devoted almost entirely to building infrastructure and industrial capacity. As a result, the role of consumer spending is decreasing. Moreover, Beijing’s export-promotion policies, like holding down the value of the renminbi, are also anti-consumer. Although Chinese leaders talk about increasing consumption, on balance they are doing their best to undermine it.

Fogel lists all of China’s problems in this 2,400-word article in exactly one single sentence (although he did find room for three paragraphs on the infertility of European women).

I smell economist malpractice, and Fogel should be relieved that the Swedes don’t take back Nobel prizes.